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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 33-69996
COMMONWEALTH INCOME & GROWTH FUND III
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2735641
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1160 West Swedesford Road
Berwyn, Pennsylvania 19312
(Address, including zip code, of principal executive offices)
(610) 647-6800
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)
Certain exhibits to the Company's Registration Statement on Form S-1
(File No. 33-69996) and Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 are incorporated by reference as Exhibits in Part IV of this
Report.
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PART I
ITEM 1: BUSINESS
GENERAL
Commonwealth Income and Growth Fund III (the "Partnership") was formed on
April 17, 1997, under the Pennsylvania Revised Uniform Limited Partnership Act.
The Partnership began offering $15,000,000 of Units of Limited Partnership
("Units") to the public on July 25, 1997 (the "Offerings"). On January 27, 1998,
the Partnership received and accepted subscription proceeds of $1,526,000, which
exceeded the minimum offering amount of $1,500,000 and the funds were released
from escrow. As of March 31, 2000, subscribers for 137,525 Units ($ 2,750,500)
had been admitted as Limited Partners of the Partnership.
See "The Glossary" below for the definition of capitalized terms not
otherwise defined in the text of this report.
PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership will utilize the net proceeds of the Offering to purchase IBM
and IBM compatible computer peripheral and other similar capital equipment. The
Partnership will utilize Retained Proceeds and debt financing (not to exceed 30%
of the aggregate cost of the Equipment owned or subject to Conditional Sales
Contract by the Partnership at the time the debt is incurred) to purchase
additional Equipment. The Partnership plans to acquire Equipment ,which is
subject to lease principally to U.S. corporations and other institutions
pursuant predominantly to Operating Leases. The Partnership retains the
flexibility to enter into Full Payout Net Leases and Conditional Sales
Contracts, but has not done so.
The Partnership's principal investment objectives are to:
(a) acquire, lease and sell Equipment to generate revenues from
operations sufficient to provide quarterly cash distributions to Limited
Partners;
(b) preserve and protect Limited Partners' capital;
(c) use a portion of Cash Flow and Net Disposition Proceeds derived
from the sale, refinancing or other disposition of Equipment to purchase
additional Equipment; and
(d) refinance, sell or otherwise dispose of Equipment in a manner that
will maximize the proceeds to the Partnership.
THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.
Limited Partners do not have the right to vote on or otherwise approve or
disapprove any particular investment to be made by the Partnership.
Although the Partnership anticipates acquiring predominately new Equipment,
the Partnership may purchase used Equipment. Generally, Equipment is acquired
from manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessor, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for Equipment provide for service and replacement of parts during a
limited period. Equipment purchases are also made through lease brokers and on
an ad hoc basis to meet the needs of a particular lessee.
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As of December 31 1999, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was entered into with a
third party when the Partnership acquired an item of Equipment. The Partnership
may also engage in sale/leaseback transactions, pursuant to which the
Partnership would purchase Equipment from companies that would then immediately
lease the Equipment from the Partnership. The Partnership may also purchase
Equipment which is leased under Full Payout Net Leases or sold under Conditional
Sales Contracts at the time of acquisition or the Partnership may enter into a
Full Payout Net Lease or Conditional Sales Contract with a third party when the
Partnership acquires an item of Equipment.
The Partnership may enter into arrangements with one or more manufacturers
pursuant to which the Partnership purchases from such manufacturers Equipment
which has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 1999,
the Partnership has not entered into any such agreements.
The General Partner has the discretion consistent with its fiduciary duty
to change the investment objectives of the Partnership if it determines that
such a change is in the best interest of the Limited Partners and so long as
such a change is consistent with the Partnership Agreement. The General Partner
will notify the Limited Partners if it makes such a determination to change the
Partnership's investment objectives.
TYPES OF EQUIPMENT
COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists of
devices used to convey information into and out of a central processing unit (or
"mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving, and
processing information by computer.
The Partnership acquires primarily IBM manufactured or IBM compatible
equipment. The General Partner believes that dealing in IBM or IBM compatible
equipment is particularly advantageous because of the large IBM customer base,
policy of supporting users with software and maintenance services and the large
amount of IBM and IBM compatible equipment in the marketplace.
Computer technology has developed rapidly in recent years and is expected
to continue to do so. Technological advances have permitted continued reductions
in the cost of computer processing capacity, thereby permitting applications not
economically feasible a few years ago. Much of the older IBM and IBM compatible
computer peripheral equipment has not been retired from service, because
software is generally interchangeable between older and newer equipment, and
older equipment is capable of performing many of the same functions as newer
equipment. The General Partner believes that historically values of peripheral
equipment have been affected less dramatically by changes in technology than
have the values of central processing units. An equipment user who upgrades to a
more advanced central processor generally can continue to use his existing
peripheral equipment. Peripheral equipment nevertheless is subject to declines
in value as new, improved models are developed and become available.
Technological advances and other factors, including year 2000 issues discussed
below in Management Discussion and Analysis, have at times caused dramatic
reduction in the market prices of older models of IBM and IBM compatible
computer peripheral equipment from the prices at which they were originally
introduced.
OTHER EQUIPMENT-RESTRICTIONS. The Partnership plans to acquire computer
peripheral equipment, such as tape drives, disk drives, tape controllers, disk
controllers, printers, terminals and related control units, all of which are in
some way related to the process of storing, retrieving and processing
information by computer. The General Partner is also authorized, but does not
presently intend, to cause the Partnership
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to invest in non-IBM compatible computer peripheral, data processing,
telecommunication or medical technology equipment. The Partnership may not
invest in any of such other types of Equipment (i) to the extent that the
purchase price of such Equipment, together with the aggregate Purchase Price of
all such other types of Equipment then owned by the Partnership, is in excess of
25% of the total cost of all of the assets of the Partnership at the time of the
Partnership's commitment to invest therein; and (ii) unless the General Partner
determines that such purchase is in the best economic interest of the
Partnership at the time of the purchase and, in the case of non-IBM compatible
peripheral Equipment, that such Equipment is comparable in quality to similar
IBM or IBM compatible Equipment. There can be no assurance that any Equipment
investments can be found which meet this standard. Accordingly, there can be no
assurance that investments of this type will be made by the Partnership.
DIVERSIFICATION
Diversification is generally desirable to minimize the effects of changes
in specific industries, local economic conditions or similar risks. However, the
extent of the Partnership's diversification, in the aggregate and within each
category of Equipment, depends in part upon the financing which can be assumed
by the Partnership or borrowed from third parties on satisfactory terms. The
Partnership's policy not to borrow on a recourse basis will further limit its
financing options. Diversification also depends on the availability of various
types of Equipment. As of December 31, 1999, the Partnership has acquired a
diversified Equipment portfolio that it has leased to 10 different companies
located throughout the United States. Approximately 28% of the Equipment
acquired by the Partnership consists of tape storage. Approximately 69% of the
Equipment acquired by the Partnership consists of workstations, department
servers and enterprise servers. Approximately 3% of the Equipment acquired by
the Partnership consists of communication controllers. During the operational
stage of the Partnership, the Partnership may not at any one point in time lease
(or sell pursuant to a Conditional Sales Contract) more than 25% of the
Equipment to a single Person or Affiliated group of Persons.
DESCRIPTION OF LEASES
The Partnership intends to purchase only Equipment that is subject to a
lease or for which a lease or similar agreement will be entered into
contemporaneously with the consummation of the Partnership's acquisition of the
Equipment. The General Partner intends to lease most of the Equipment purchased
by the Partnership to third parties pursuant to Operating Leases. Operating
Leases are relatively short-term (12 to 48 month) leases under which the
aggregate noncancellable rental payments during the original term of the lease
are not sufficient to permit the lessor to recover the purchase price of the
subject Equipment. The Equipment may also be leased pursuant to Full Payout Net
Leases. Full Payout Net Leases are leases under which the aggregate
noncancellable rental payments during the original term of the lease are at
least sufficient to recover the purchase price of the subject Equipment. It is
anticipated that the Partnership will enter into few, if any, Full Payout net
Leases. The General Partner may also enter into Conditional Sales Contracts for
Equipment. A Conditional Sales Contract generally provides that the
noncancellable payments to the seller over the term of the contract are
sufficient to recover the investment in such Equipment and to provide a return
on such investment. Under a Conditional Sales Contract, the seller reserves
title to, and retain a security interest in, the Equipment until the Purchase
Price of the Equipment is paid. As of December 31 1999, the Partnership has not
entered into any Full Payout Net Leases or Conditional Sales Contracts for
Equipment and does not presently intend to do so.
In general, the terms of the Partnership's leases, whether the Equipment is
leased pursuant to an Operating Lease or a Full Payout Net Lease, depend upon a
variety of factors, including: the desirability of each type of lease from both
an investment and a tax point of view; the relative demand among lessees for
Operating or Full Payout Net Leases; the type and use of Equipment and its
anticipated residual value; the business of the lessee and its credit rating;
the availability and cost of financing; regulatory considerations; the
accounting treatment of the lease sought by the lessee or the Partnership; and
competitive factors.
An Operating Lease generally represents a greater risk to the Partnership
than a Full Payout Net Lease, because in order to recover the purchase price of
the subject Equipment and earn a return on such
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investment, it is necessary to renew or extend the Operating Lease, lease the
Equipment to a third party at the end of the original lease term, or sell the
Equipment. On the other hand, the term of an Operating Lease is generally much
shorter than the term of a Full Payout Net Lease, and the lessor is thus
afforded an opportunity under an Operating Lease to re-lease or sell the subject
Equipment at an earlier stage of the Equipment's life cycle than under a Full
Payout Net Lease. Also, the annual rental payments received under an Operating
Lease are ordinarily higher than those received under a Full Payout Net Lease.
The Partnership's policy is to generally enter into "triple net leases" (or
the equivalent, in the case of a Conditional Sales Contract) which typically
provide that the lessee or some other party bear the risk of physical loss of
the Equipment; pay taxes relating to the lease or use of the Equipment; maintain
the Equipment; indemnify the Partnership-lessor against any liability suffered
by the Partnership as the result of any act or omission of the lessee or its
agents; maintain casualty insurance in an amount equal to the greater of the
full value of the Equipment and a specified amount set forth in the lease; and
maintain liability insurance naming the Partnership as an additional insured
with a minimum coverage which the General Partner deems appropriate. In
addition, the Partnership may purchase "umbrella" insurance policies to cover
excess liability and casualty losses, to the extent deemed practicable and
advisable by the General Partner. As of December 31, 1999, all leases that have
been entered into are "triple net leases".
The General Partner has not established any standards for lessees to whom
it will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis of all potential lessees will be undertaken by the General
Partner to determine the lessee's ability to make payments under the proposed
lease. The General Partner may refuse to enter into an agreement with a
potential lessee based on the outcome of the credit analysis.
The terms and conditions of the Partnership's leases, or Conditional Sales
Contracts, are each determined by negotiation and may impose substantial
obligations upon the Partnership. Where the Partnership assumes maintenance or
service obligations, the General Partner generally causes the Partnership to
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
generally require annual or more frequent adjustment of service fees. As of
December 31, 1999, the Partnership has not entered into any such agreements.
BORROWING POLICIES
The General Partner, at its discretion, may cause the Partnership to incur
debt in the maximum aggregate amount of 30% of the aggregate cost of the
Equipment owned by the Partnership, or subject to Conditional Sales Contract
(except that the partnership may not incur any indebtedness to acquire Equipment
until the net proceeds of the Offering are fully invested, or committed to
investment, in Equipment. The Partnership will incur only non-recourse debt that
is secured by Equipment and lease income there from. Such leveraging permits the
Partnership to increase the aggregate amount of its depreciable assets, and, as
a result, potentially increases both its lease revenues and its federal income
tax deductions above those levels, which would be achieved without leveraging.
There is no limit on the amount of debt that may be incurred in connection with
the acquisition of any single item of Equipment. Any debt incurred is fully
amortized over the term of the initial lease or Conditional Sales Contract to
which the Equipment securing the debt is subject. The precise amount borrowed by
the Partnership depends on a number of factors, including the types of Equipment
acquired by the Partnership; the creditworthiness of the lessee; the
availability of suitable financing; and prevailing interest rates. The
Partnership is flexible in the degree of leverage it employs, within the
permissible limit. There can be no assurance that credit will be available to
the Partnership in the amount or at the time desired or on terms considered
reasonable by the General Partner. As of December 31, 1999, the aggregate
non-recourse debt outstanding of $976,142 was 29% of the aggregate cost of
Equipment owned.
The Partnership may purchase some items of Equipment without leverage. If
the Partnership purchases an item of Equipment without leverage and thereafter
suitable financing becomes available, it may then
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obtain the financing, secure the financing with the purchased Equipment to the
extent practicable and invest any proceeds from such financing in additional
items of Equipment, or it may distribute some or all of such proceeds to the
Limited Partners. Any such later financing will be on terms consistent with the
terms applicable to borrowings generally. As of December 31, 1999, the
Partnership has not exercised this option.
After the net proceeds of the Offering are fully invested in Equipment, the
General Partner plans to cause the Partnership to borrow funds, to the fullest
extent practicable, at interest rates fixed at the time of borrowing. However,
the Partnership may borrow funds at rates that vary with the "prime" or "base"
rate. If lease revenues were fixed, a rise in the "prime" or "base" rate would
increase borrowing costs and reduce the amount of the Partnership's income and
cash available for distribution. Therefore, the General Partner is permitted to
borrow funds to purchase Equipment at fluctuating rates only if the lease for
such Equipment provides for fluctuating rental payments calculated on a similar
basis.
Any additional debt incurred by the Partnership must be nonrecourse.
Nonrecourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from leasing
or selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any nonrecourse debt.
Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a significant portion of the Partnership's revenues
from the leasing of Equipment will be reserved for repayment of debt, the use of
financing reduces the cash that might otherwise be available for distributions
until the debt has been repaid and may reduce the Partnership's Cash Flow over a
substantial portion of the Partnership's operating life. As of December 31,
1999, no such agreements existed.
The General Partner and any of its Affiliates may, but are not required to,
make loans to the Partnership on a short-term basis. If the General Partner or
any of its Affiliates makes such a short-term loan to the Partnership, the
General Partner of Affiliate may not charge interest at a rate greater that the
interest rate charged by unrelated lenders on comparable loans for the same
purpose in the same locality. In no event is the Partnership required to pay
interest on any such loan at an annual rate greater than three percent over the
"prime rate' from time to time announced by PNC Bank, Philadelphia, Pennsylvania
("PNC Bank"). All payments of principal and interest on any financing provided
by the General Partner or any of its affiliates are due and payable by the
Partnership within 12 months after the date of the loan.
REFINANCING POLICIES
Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. As of
December 31, 1999, the Partnership has not refinanced any of its debt.
Refinancing, if achievable, may permit the Partnership to retain an item of
Equipment and at the same time to generate additional funds for reinvestment in
additional Equipment or for distribution to the Limited Partners.
LIQUIDATION POLICIES
The General Partner intends to cause the Partnership to begin disposing of
its Equipment in approximately January 2009. Notwithstanding the Partnership's
objective to sell all of its assets and dissolve in approximately by December
31, 2009, the General Partner may at any time cause the Partnership to dispose
of all its Equipment and, dissolve the Partnership upon the approval of Limited
Partners holding a Majority in Interest of Units.
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Particular items of Equipment may be sold at any time if, in the judgment
of the General Partner, it is in the best interest of the Partnership to do so.
The determination of whether particular items of Partnership Equipment should be
sold or otherwise disposed of is made by the General Partner after consideration
of all relevant factors (including prevailing general economic conditions,
lessee demand, the General Partner's views of current and future market
conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow and federal income tax considerations), with a view
toward achieving the principal investment objectives of the Partnership. As
partial payment for Equipment sold, the Partnership may receive purchase money
obligations secured by liens on such Equipment. Subject to the General Partner's
discretion the Partnership may extend beyond December 31, 2009, if deemed
beneficial to the Partnership.
MANAGEMENT OF EQUIPMENT
Equipment management services for the Partnership's Equipment is provided
by the General Partner and its Affiliates and by persons employed by the General
Partner. Such services will consist of collection of income from the Equipment,
negotiation and review of leases, Conditional Sales Contracts and sales
agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports.
COMPETITION
The equipment leasing industry is highly competitive. The Partnership
competes with leasing companies, equipment manufacturers and their affiliated
financing companies, distributors and entities similar to the Partnership
(including other programs sponsored by the General Partner), some of which have
greater financial resources than the Partnership and more experience in the
equipment leasing business than the General Partner. Other leasing companies and
equipment manufacturers, their affiliated financing companies and distributors
may be in a position to offer equipment to prospective lessees on financial
terms that are more favorable than those which the Partnership can offer. They
may also be in a position to offer trade-in privileges, software, maintenance
contracts and other services that the Partnership may not be able to offer.
Equipment manufacturers and distributors may offer to sell equipment on terms
(such as liberal financing terms and exchange privileges), which will afford
benefits to the purchaser similar to those obtained through leases. As a result
of the advantages that certain of its competitors may have, the Partnership may
find it necessary to lease its Equipment on a less favorable basis than certain
of its competitors.
The computer peripheral equipment industry is extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Certain manufacturer-lessors maintain advantages through patent
protection, where applicable, and through a policy that combines service and
hardware with payment accomplished through a single periodic charge.
The dominant firm in the computer marketplace is International Business
Machines Corporation, and its subsidiary IBM Credit Corporation is the dominant
force in the leasing of IBM equipment. Because of IBM's substantial resources
and dominant position, revolutionary changes with respect to computer systems,
pricing, marketing practices, technological innovation and the availability of
new and attractive financing plans could occur at any time. Significant action
in any of these areas by IBM or IBM Credit Corporation might materially
adversely affect the Partnership's business or the other manufacturers with whom
the General Partner might negotiate purchase and other agreements. Any adverse
effect on these manufacturers could be reflected in the overall return realized
by the Partnership on equipment from those manufacturers of from IBM.
INVESTMENTS
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As of March 18, 2000, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:
<TABLE>
<CAPTION>
EQUIPMENT PURCHASE LIST MONTHLY LEASE
LESSEE MFG DESCRIPTION PRICE PRICE RENT TERM
<S> <C> <C> <C> <C> <C> <C>
Lucent SUN (12) Workstations 139,596 239,340 3,857 32
Lucent SUN Server 445,714 739,350 12,120 32
Chase SUN Server 252,681 394,360 6,493 36
Cendant SUN Server 131,470 221,095 3,216 36
Cendant SUN Server upgrade 40,382 39,590 1425 31
Chase STK Timberline drive 407,908 1,134,830 12,346 24
Chrysler IBM Controller 19,496 24,200 731 24
Chrysler IBM Controller 18,392 24,200 731 24
Kaiser IBM (7) Workstations 373,747 513,741 9,952 36
Kaiser IBM (4) Workstations 187,398 271,949 4,983 36
Kaiser CISCO (26) Routers 153,093 258,778 3,929 36
International Paper DEC (2) Servers 140,857 184,372 4,042 32
CMGI CISCO Server 140,579 187,345 3,973 35
CMGI SUN Workstations 24,342 32,029 937 24
AT&T ASX Controllers 58,048 59,106 1,654 36
Hartford Insurance INRANGE (2) Quad-B Port Modulars 756,428 1,778,850 19,800 36
Morgan Stanley SUN Server 180,353 272,026 4,686 36
</TABLE>
Because the Partnership's leases are on a "triple-net" basis, no permanent
reserve for maintenance and repairs will be established from the Offering
Proceeds. However, the General Partner, in its sole discretion, may retain a
portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established if available Cash
Flow of the Partnership is insufficient to cover the Partnership's operating
expenses and liabilities, it may be necessary for the Partnership to obtain
funds by refinancing its Equipment or borrowing.
GENERAL RESTRICTIONS
Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:
(a) invest in junior trust deeds unless received in connection with
the sale of an item of Equipment in an aggregate amount which does not
exceed 30% of the assets of the Partnership on the date of the investment;
(b) invest in or underwrite the securities of other issuers;
(c) acquire any Equipment for Units;
(d) issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be deemed
to be the issuance of senior securities);
(e) make loans to any Person, including the General Partner or any of
its Affiliates, except to the extent a Conditional Sales Contract
constitutes a loan;
(f) sell or lease any Equipment to, lease any Equipment from, or enter
into any sale- leaseback transactions with, the General Partner or any of
its Affiliates; or
(g) give the General Partner or any of its Affiliates an exclusive
right or employment to sell the Partnership's Equipment.
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The General Partner has also agreed in the Partnership Agreement to use its
best efforts to assure that the Partnership shall not be deemed an "investment
company" as such term is detained in the Investment Company Act of 1940.
The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its Affiliates
may receive any rebate or "give up" in connection with the Partnership's
activities or participate in reciprocal business arrangements that circumvent
the restrictions in the Partnership Agreement against dealings with Affiliates.
EMPLOYEES
The Partnership has no employees and received administrative and other
services from the General Partner which has 12 employees.
ITEM 2: PROPERTIES
NOT APPLICABLE
ITEM 3: LEGAL PROCEEDINGS
NOT APPLICABLE
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE
PART II
ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no public market for the Units nor is it anticipated that one will
develop. The Units are not listed on any exchange or permitted to trade on any
over-the-counter market. In addition, there are substantial restrictions on the
transferability of Units. As of March 31, 2000, there were 161 holders of Units.
GENERAL LIMITATIONS
Units cannot be transferred without the consent of the General Partner,
which may be withheld in its absolute discretion. The General Partner monitors
transfers of Units in an effort to ensure that all transfers are within certain
safe harbors promulgated by the IRS to furnish guidance regarding publicly
traded partnerships. These safe harbors limit the number of transfers that can
occur in any one year. The General Partner intends to cause the Partnership to
comply with the safe harbor that permits nonexempt transfers and redemptions of
Units of up to five percent of the total outstanding interest in the
Partnership's capital or profits in any one year.
REDEMPTION PROVISION
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Upon the conclusion of the 30 month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding Units. After such 30 month period, on a
semi-annual basis, the General Partner, at its discretion, will establish an
amount for redemption, generally not to exceed two percent of the outstanding
Units per year, subject to the General Partner's good faith determination that
such redemptions will not (a) cause the Partnership to be taxed as a corporation
under Section 7704 of the Code or (b) impair the capital or operations of the
Partnership. (The Partnership may redeem Units in excess of the two percent
limitation if, in the good faith judgment of the General Partner, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale. Following the determination of
the annual redemption amount, redemptions will occur on a semi-annual basis and
all requests for redemption, which must be made in writing, must be on file as
of the Record Date in which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority being given to
Units owned by estates, followed by IRAs and Qualified Plans. All other request
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
request will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).
The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on the
period of time that a redemption request may be pending prior to its being
granted. Limited Partners will not be required to hold their interest in the
Partnership for any specified period prior to their making a redemption request.
In order to make a redemption request, Limited Partners will be required to
advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.
EXEMPT TRANSFERS
The following six categories of transfers are exempt transfers for purposes
of calculating the volume limitations imposed by the IRS and will generally be
permitted by the General Partner:
(1) transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in the
hands of the transferor (for example, Units acquired by corporations in certain
reorganizations, contributions to capital, gifts of Units, Units contributed to
another partnership, and nonliquidating as well as liquidating distributions by
a parent partnership to its partners of interests in a subpartnership);
(2) transfers at death;
(3) transfers between members of a family (which include brothers and
sisters, spouse, ancestors, and lineal descendants);
(4) transfers resulting from the issuance of Units by the Partnership
in exchange for cash, property, or services;
(5) transfers resulting from distributions from Qualified Plans; and
(6) any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the aggregate more than five
percent of the total outstanding interests in capital or profits of the
Partnership.
ADDITIONAL RESTRICTIONS ON TRANSFER
10
<PAGE>
Limited Partners who wish to transfer their Units to a new beneficial owner
are required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and take such other
actions and execute such other documents as may be reasonably requested by the
General Partner. There is no charge for re-registration of a certificate in the
event of a marriage, divorce, death, or trust so long as the transfer is not a
result of a sale of the Units.
In addition, the following restrictions apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the outstanding Units to
be owned by benefit plans; and (ii) no transfer is permitted unless the
transferee obtains such governmental approvals as may reasonably be required by
the General Partner, including without limitation, the written consents of the
Pennsylvania Securities Commissioner and of any other state securities agency or
commission having jurisdiction over the transfer.
ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
Cash distributions, if any, will be made quarterly on December 31, March
31, June 30, and September 30 of each year. Distributions are made 99% to the
Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to their Capital Contributions plus the
Cumulative Return; thereafter, cash distributions will be made 90% to Limited
Partners and 10% to the General Partner. Distributions made in connection with
the liquidation of the Partnership or a Partner's Units will be made in
accordance with the Partner's positive Capital Account balance as determined
under the Partnership Agreement and Treasury Regulations.
The Cumulative Return is calculated on the Limited Partners' Adjusted
Capital Contributions for their Units. The Adjusted Capital Contributions will
initially be equal to the amount paid by the Limited Partners for their Units.
If distributions at any time exceed the Cumulative Return, the Adjusted Capital
Contributions will be reduced by the excess, decreasing the base on which the
Cumulative Return is calculated.
If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.
Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.
Net Profits and Net Losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of the
Code and the Treasury Regulation promulgated thereunder. No Limited Partner is
required to contribute cash to the capital of the Partnership in order to
restore a closing Capital Account deficit, and the General Partner has only a
limited deficit restoration obligation under the Partnership Agreement.
Quarterly distributions in the following amounts were declared and paid to
the Limited Partners during 1999.
11
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED 1999
----------------------------------
<S> <C>
March 31 $ 51,493
June 30 55,840
September 30 68,987
December 31 49,484
--------
$225,804
--------
--------
</TABLE>
ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
Except during the Offering Period, Cash Available for Distribution, which
is allocable to the Limited Partners, is apportioned among and distributed to
them solely with reference to the number of Units owned by each as of the Record
Date for each such distribution. During the Offering Period, Cash Available for
Distribution which is allocable to the Limited Partners is apportioned among and
distributed to them with reference to both (i) the number of Units owned by each
as of each Record Date and (ii) the number of days since the previous Record
Date (or, in the case of the first Record Date, the commencement of the Offering
Period) that the Limited Partner owned the Units.
After the Offering Period, Net Profits, Net Losses and Cash Available for
Distribution allocable to the Limited Partners is apportioned among them in
accordance with the number of Units owned by each. A different convention is
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners is apportioned among them in the ratio which the
product of the number of Units owned by a Limited Partner multiplied by the
number of days in which the Limited Partner owns such Units during the period
bears to the sum of such products for all Limited Partners.
In addition, where a Limited Partner transfers Units during a taxable year,
the Limited Partner may be allocated Net Profits for a period for which such
Limited Partner does not receive a corresponding cash distribution.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth, in summary form, certain financial data for
the Partnership for the period January 1, 1999 to December 31,1999. This table
is qualified in its entirely by the more detailed information and financial
statement presented elsewhere in this report, and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
herein.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------------
<S> <C> <C>
Lease Income $937,851 $306,249
Net (Loss) Income (308,734) 18,250
Cash Distributions to Limited Partners 225,804 164,760
Net (Loss) Income per Unit (2.62) .16
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Cash Distribution per Unit 1.90 1.63
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------------------------
<S> <C> <C>
Total Assets $2,742,250 $1,860,336
Notes Payable 976,142 8,442
</TABLE>
Net (loss) income per unit is computed based upon net (loss) income allocated
to the Limited Partners and the weighted average number of equivalent Limited
Partnership Units outstanding during the period. Cash distribution per Unit is
computed based upon distributions allocated to the Limited Partners and the
weighted average number of equivalent Limited Partnership Units outstanding
during the period.
ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of capital for the years ended December 31,
1999, 1998, were from cash from operations of $209,246 $271,818, respectively,
and from Partners' contributions of $515,849 and $2142,340, respectively, for
the years ended December 31, 1999 and 1998. The primary uses of cash for the
years ended December 31, 1999, and 1998, were for capital expenditures for new
equipment totaling $730,316, and $1,448,552, the payment of acquisition fees of
$66,279, and $72,527, for the payment of preferred distributions to partners
totaling $227,995, and $166,451, respectively, and for the payment of offering
costs totaling $46,426, and $192,856, respectively, for the years ended December
31, 1999 and 1998.
Cash is invested in money market accounts that invest directly in treasury
obligations pending the Partnership's use of such funds to purchase additional
computer equipment, to pay Partnership expenses or to make distributions to the
Partners. At December 31, 1999, 1998 the Partnership had approximately $138,826,
and $507,193 respectively, invested in these money market accounts.
The Partnership's investment strategy of acquiring computer equipment and
generally leasing it under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
Future minimum rentals on noncancellable operating leases increased by 104% from
December 31,1998 to December 31, 1999, due to additional computer equipment
leases which commenced in 1999. As of December 31, 1999, the Partnership had
future minimum rentals on noncancellable operating leases of $1,031,136 for the
year ended 2000 and $849,963 thereafter. During 1999 and 1998, the Partnership
incurred debt in connection with the purchase of computer equipment totaling
$976,142 and $8,442, respectively. At December 31, 1999, the outstanding debt
was $1,238,608, with interest rates ranging from 6.4% to 8.2% and will be
payable through September 2002. The Partnership intends to continue purchasing
additional computer equipment with existing cash, as well as when future cash
becomes available. In addition, the Partnership may incur debt in purchasing
computer equipment in the future.
The Partnership's cash flow from operations is expected to continue to be
adequate to cover all operating expenses, liabilities, and preferred
distributions to Partners during the next 12-month period. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the Partnership will
attempt to obtain additional funds by disposing of or refinancing Equipment, or
by borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.
13
<PAGE>
RESULTS OF OPERATIONS
1999 AND 1998 OPERATING RESULTS
For the years ended December 31, 1999 and 1998, the Partnership recognized
income of $954,000, and $344,000 and expenses of $1,263,000, and $326,000,
resulting in a net loss of $309,000, for the year ended December 31, 1999 and
net income of $18,000 for the year ended December 31, 1998.
Lease income increased by 206% over 1998 primarily due to the addition of
operating leases in 1999. In 1999 the partnership expended approximately
$797,000 in cash and assumed debt for equipment of $1,239,000 to acquire 9
additional leases.
Interest income decreased 57% from $38,000 for the year ended December 31, 1998
to $16,000 for the year ended December 31, 1999, as a result of the capital
contributions and rental income being used to purchase additional computer
equipment, whereas for the year ended December 31, 1998 the rental income and
capital contributions were temporarily invested in money market accounts until
being utilized for equipment purchases.
Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to Com Cap Corp. for
administration and operation of the Partnership. The 485% increase from
approximately $47,000 during the year ended December 31, 1998 to $275,000 during
the year ended December 31, 1999 is primarily attributable to an increase in
reimbursable expenses paid to the General Partner and its affiliates of $45,000,
of which a portion relates to 1998, an increase in outside service fees of
$53,000, expenses relating to the Partnership's post-effective amendment which
included costs to comply with the plain-English rules promulgated by the SEC of
$77,000,and $40,000 directly related to the increase in leasing activity.
The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment that is subject to operating leases. The equipment
management fee increased 213% from approximately $15,000 during the year ended
December 31, 1998 to $47,000, during the year ended December 31, 1999, which is
consistent with the increase in lease income.
Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organization costs, equipment acquisition fees and
debt placement fees. The 236% increase from approximately $263,000 during the
year ended December 31, 1998 to $885,000 during the year ended December 31, 1999
is attributable to the increase in the computer equipment portfolio being
leased.
The Partnership identified specific computer equipment and associated equipment
acquisition costs which were evaluated due to technological changes in
accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The Partnership
determined that the carrying amount of certain assets was greater than the
undiscounted cash flows to be generated by these assets. The Partnership
recorded a charge of $115,000 to depreciation expense to record the assets at
their estimated fair value at December 31, 1999. No charge was necessary in
1998.
For the year ended December 31, 1999, the Partnership generated cash flow from
operating activities of $209,246, which includes net loss of $308,734 reduced by
depreciation and amortization expenses of $885,463. Other noncash activities
included in the determination of net income include direct payments of lease
income by lessees to banks of $270,908.
IMPACT OF YEAR 2000
The Partnership does not have any computer programs or systems as all services
required for the management of the Partnership are provided by the General
Partner which receives fees and certain reimbursements for these services.
Therefore, the General Partner is responsible for evaluating Year 2000 issues.
In late 1999, the General Partner completed its remediation and testing of
systems. As a result of those planning and implementation efforts, the General
Partner experienced no significant disruptions in
14
<PAGE>
mission critical information technology and non-information technology systems
and believes those systems responded to the year 2000 date change. The General
Partner expensed approximately $14,000 during 1999 in connection with
remediating its systems. The General Partner is not aware of any material
problems resulting from year 2000 issues, either with its internal systems, or
the products or services of third parties. The General Partner will continue to
monitor its mission critical computer applications throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
ITEM 7.A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership believes its exposure to market risk is not material due to
the fixed interest rate of its long term debt.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The General Partner, a wholly-owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of Commonwealth Capital Corp., a Pennsylvania corporation ("Com Cap
Corp."), was incorporated in Pennsylvania on August 26, 1993. The General
Partner also acts as the General Partner for Commonwealth Income and Growth Fund
I and Commonwealth Income and Growth Fund II. The principal business office of
the General Partner is 1160 West Swedesford Road, Suite 340, Berwyn, PA 19312,
and its telephone number is 610-647-6800. The General Partner manages and
controls the affairs of the Partnership and has sole responsibility for all
aspects of the Partnership's operations. The officers of the General Partner
devote such time to the affairs of the Partnership as in the opinion of the
General Partner is necessary to enable it to perform its function as General
Partner. The officers of the General Partner are not required to spend their
full time in meeting their obligations to the Partnership.
The directors and officers of the General Partner and key employees of
Com Cap Corp. are as follows:
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
George S. Springsteen Chairman of the Board of Directors and President of the
General Partner and Com Cap Corp.
Kimberly A. MacDougall Executive Vice President, Chief Operating Officer and
Secretary of the General Partner and Com Cap Corp.
Henry J. Abbott Vice President and Portfolio Manager of Com Cap Corp.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
John A. Conboy III Assistant Vice President and Accounting Manager of the
General Partner and Com Cap Corp.
Dorothy A. Ferguson Assistant Vice President of Com Cap Corp.
</TABLE>
George S. Springsteen, age 65, is President of both Com Cap Corp. and
the General Partner. Mr. Springsteen is also President of the general partners
or controlling entities of several prior programs sponsored by Com Cap Corp.
with objectives similar to the Partnership's. He has been the sole shareholder
and director of Com Cap Corp. since its formation in 1978. From 1971 to 1978,
Mr. Springsteen was involved in the computer leasing business of Granite
Computer Corporation. Mr. Springsteen served as Vice President of Marketing, in
addition to other capacities, and managed a portfolio of approximately
$120,000,000 of IBM computers and peripherals. In 1978, Granite Computer
Corporation sold its equipment portfolio and left the equipment leasing
business. Mr. Springsteen acquired a portion of Granite's portfolio, client
base, employees and corporate offices in Jenkintown, Pennsylvania. The new
company began operations as Com Cap Corp. in May of 1978. Mr. Springsteen
received a Bachelor of Science degree from the University of Delaware in 1957.
Kimberly A. MacDougall, age 40, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the General Partner and
joined Com Cap Corp. in 1997. She is also the President of Commonwealth Capital
Securities Corp. From 1980 to 1997, Ms. MacDougall was employed with Wheat First
Butcher Singer, a broker/dealer headquartered in Richmond, Virginia. While at
Wheat First Butcher Singer, Ms. MacDougall, Senior Vice President, served as
Marketing Manager for the Direct Investments Department, with over $450,000,000
of investments under management in real estate, equipment leasing and
energy-related industries. Ms. MacDougall holds Series 7, 63 and 39 NASD
licenses and is a member of the Equipment Leasing Association, Investment
Partnership Association, and International Association for Financial Planning.
John A. Conboy III, age 53, is Assistant Vice President and Accounting
Manager of the General Partner and Com Cap Corp. and certain of its subsidiaries
where he has been employed since 1999. From 1965 to 1996, Mr. Conboy was
employed as a Manager of Accounting Operations of Consolidated Rail Corporation.
Mr. Conboy received a BS/BA degree in Accounting and Business Administration
from the University of Phoenix in 1994. Mr. Conboy is a member of the Equipment
Leasing Association.
Henry J. Abbott, age 48, is Vice President and Portfolio Manager of Com
Cap Corp. and has been employed by Com Cap Corp. since 1998. Mr. Abbot has been
active in the commercial lending industry, working primarily on asset-backed
transactions for more than twenty-seven years. Prior to joining Com Cap Corp.
Mr. Abbott was a founding partner of Westwood Capital LLC, in New York. Prior to
that, as Senior Vice President for IBJ Schroder Leasing Corporation where Mr.
Abbott managed a group specializing in providing operating lease financing
programs in the high technology sector. Mr. Abbott brings extensive knowledge
and experience in all facets of asset-backed financing and has successfully
managed $1.5 billion of secured transactions. Mr. Abbott attended St. John's
University. Mr. Abbott is a member of the Equipment Leasing Association.
The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary in the sole
discretion of the directors of the General Partner for the proper conduct of the
Partnership's business. A substantial amount of time of such directors and
officers is expected to be spent on matters unrelated to the Partnership,
particularly after the Partnership's investments have been selected. Under
certain circumstances, such directors and officers are entitled to
indemnification from the Partnership.
ITEM 11: EXECUTIVE COMPENSATION
16
<PAGE>
The following table summarizes the types, amounts and recipients of
compensation to be paid by the Partnership directly or indirectly to the General
Partner and its Affiliates. Some of these fees are paid regardless of the
success or profitability of the Partnership's operations and investments. While
such compensation and fees were established by the General Partner and are not
based on arm's-length negotiations, the General Partner believes that such
compensation and fees are comparable to those which would be charged by an
unaffiliated entity or entities for similar services. The Partnership Agreement
limits the liability of the General Partner and its Affiliates to the
Partnership and the Limited Partners and provides indemnification to the General
Partner and its Affiliates under certain circumstances.
<TABLE>
<CAPTION>
Amount Amount
Entity Receiving Incurred Incurred
Compensation Type of Compensation During 1999 During 1998
- ------------------------------------------------------------------------------------
OFFERING AND ORGANIZATION STAGE
<S> <C> <C> <C>
Commonwealth Underwriting Commissions. The $46,426 $192,856
Capital Securities Partnership will pay to the Dealer
Corp. Manager an aggregate amount of up
to nine percent of Capital
Contributions as Underwriting
Commissions after and only if the
required $1,500,000 Minimum
Subscription Amount is sold. The
Dealer Manager will pay other
broker-dealers ("Participating
Brokers") out of Underwriting
Commissions a selling commission
of up to eight percent of the
Capital Contributions from Units
sold by such Participating Brokers.
The amount of the Underwriting
Commissions will be determined
based upon the quantity of Units
sold to a single investor.
The General Organizational Fee. An Organization $10,060 $ 64,285
Partner Fee equal to three percent of the
first $10,000,000 of Limited
Partners' Capital Contributions and
two percent of the Limited
Partners' Capital Contribution in
excess of $10,000,000, as
compensation for the organization
of the Partnership. It is
anticipated that the Organizational
and Offering Expenses, which
include legal, accounting and
printing expenses; various
registration and filing fees;
miscellaneous expenses related to
the organization and formation of
the Partnership; other costs of
registration; and costs incurred in
connection with the preparation,
printing and distribution of this
Prospectus and other sales
literature will be approximately
$300,000. The General Partner will
pay all Organizational and Offering
Expenses, other than Underwriting
Commissions.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount Amount
Entity Receiving Incurred Incurred
Compensation Type of Compensation During 1999 During 1998
- ------------------------------------------------------------------------------------
OPERATIONAL AND SALE OR LIQUIDATION STAGES
<S> <C> <C> <C>
The General Reimbursement of Expenses. The $48,000 $7,500
Partner General Partner and its Affiliates
and its are entitled, under Section 5.2 of
Affiliates the Partnership Agreement, to
reimbursement by the Partnership
for the cost of goods, supplies or
services obtained and used by the
General Partner in connection with
the administration and operation of
the Partnership from third parties
unaffiliated with the General
Partner. The amounts set forth on
this table are approximations of
reimbursable expenses for the first
year of the Partnership's operation
and do not include expenses
incurred in the offering of Units.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount Amount
Entity Receiving Incurred Incurred
Compensation Type of Compensation During 1999 During 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
The General Equipment Acquisition Fee. An $ 66,000 $73,000
Partner Equipment Acquisition Fee of four
percent of the Purchase Price of
each item of Equipment purchased as
compensation for the negotiation of
the acquisition of the Equipment
and the lease thereof or sale under
a Conditional Sales Contract. The
fee will be paid upon closing of
the Offering with respect to the
Equipment to be purchased by the
Partnership with the net proceeds
of the Offering available for
investment in Equipment except for
fees on the leveraged portion of
the Purchase Price which are paid
when the Equipment is purchased. If
the Partnership does not purchase
Equipment with all the net proceeds
of the Offering, the General
Partner will return a pro rata
portion of the fee to the
Partnership. If the Partnership
acquires Equipment in an amount
exceeding the net proceeds of the
Offering available for investment
in Equipment, the fee will be paid
when such Equipment is acquired.
The estimated amounts set forth in
this table include fees on
Equipment assuming the maximum
allowable leverage, but exclude
such fees earned on Equipment
purchased with Retained Proceeds.
Such excluded fees may be
significant in amount. Equipment
Acquisition Fees will be lower than
the estimated maximum if a lower
level of acquisition borrowing is
utilized.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount Amount
Entity Receiving Incurred Incurred
Compensation Type of Compensation During 1999 During 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
The General Debt Placement Fee. As compensation $12,000 $0
Partner for arranging Term Debt to finance
the acquisition of Equipment by the
Partnership, a fee equal to one
percent of such indebtedness;
provided, however, that such fee
shall be reduced to the extent the
Partnership incurs such fees to
third parties, unaffiliated with
the General Partner or the lender,
with respect to such indebtedness
and no such fee will be paid with
respect to borrowings from the
General Partner or its Affiliates.
The estimated amounts set forth in
this table assume the expected
maximum allowable leverage
($535,135 if the minimum number of
Units are sold and $5,371,620 if
the maximum number of Units are
sold), but exclude such fees earned
on refinancings or debt incurred
with respect to Equipment purchased
with Retained Proceeds and
borrowings.
The General Equipment Management Fee. A monthly $47,000 $15,000
Partner fee equal to the lesser of (i) the
fees which would be charged by an
independent third party for similar
services for similar equipment or
(ii) the sum of (a) two percent of
(1) the Gross Lease Revenues
attributable to Equipment which is
subject to Full Payout Net Leases
which contain net lease provisions
plus (2) the purchase price paid on
Conditional Sales Contracts as
received by the Partnership and (b)
five percent of the Gross Lease
Revenues attributable to Equipment
which is subject to Operating
Leases.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount Amount
Entity Receiving Incurred Incurred
Compensation Type of Compensation During 1999 During 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
The General Equipment Liquidation Fee. With $0 $0
Partner respect to each item of Equipment
sold by the General Partner (other
than in connection with a
Conditional Sales Contract), a fee
equal to the lesser of (i) 50% of
the Competitive Equipment Sale
Commission or (ii) three percent of
the sales price of such Equipment.
The payment of such fee is
subordinated to the receipt by the
Limited Partners of (i) a return of
their Capital Contributions and a
10% per annum cumulative return,
compounded daily, on Adjusted
Capital Contributions ("Cumulative
Return") and (ii) the Net
Disposition Proceeds from such sale
in accordance with the Partnership
Agreement. Such fee will be reduced
to the extent any liquidation or
resale fees are paid to
unaffiliated parties.
INTEREST IN THE PARTNERSHIP
The General Partnership Interest. The General $2,191 $1,691
Partner Partner will have a present and
continuing one percent interest in
the Partnership's items of income,
gain, loss, deduction, credit, and
tax preference. In addition, the
General Partner will receive one
percent of Cash Available for
Distribution until the Limited
Partners have received
distributions of Cash Available for
Distribution equal to their Capital
Contributions plus the 10%
Cumulative Return and thereafter,
the General Partner will receive
10% of Cash Available for
Distribution. See "Risk Factors -
Dilution."
</TABLE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
NOT APPLICABLE
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership is subject to various conflicts of interest arising out
of its relationships with the General Partner and its Affiliates. These
conflicts include the following:
COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S
TIME
The General Partner and its Affiliate sponsor other investor programs
which are in potential competition with the Partnership in connection with the
purchase of Equipment as well as opportunities to lease and sell such Equipment.
Competition for Equipment has occurred and is likely to occur in the future. The
General Partner and its Affiliates may also form additional investor programs
which may be competitive with the Partnership.
If one or more investor programs and the Partnership are in a position
to acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into lease with
the same lessee or sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.
Certain senior executives of the General Partner and its Affiliates
also serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of the
General Partner and Affiliates. The officers and directors of the General
Partner are not required to devote all or substantially all of their time to the
affairs of the Partnership.
ACQUISITIONS
Com Cap Corp. and the General Partner or other Affiliates of the
General Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired, (ii)
the acquisition is in the best interest of the partnership and (iii) no benefit
to the General Partner or its Affiliates arises from the acquisition except for
compensation paid to Com Cap Corp., the General Partner or such other Affiliate
as disclosed in this Report. Com Cap Corp., the General Partner or their
Affiliates will not hold Equipment for more than 60 days prior to transfer to
the Partnership. If sufficient funds become available to the Partnership within
such 60 day period, such Equipment may be resold to the Partnership for a price
not in excess of the sum of the cost of the Equipment to such entity and any
accountable Acquisition Expenses payable to third parties which are incurred by
such entity and interest on the Purchase Price from the date of purchase to the
date of transfer to the Partnership. Com Cap Corp.,
17
<PAGE>
the General Partner or such other Affiliate will retain any rent or other
payments received for the Equipment, and bear all expenses and liabilities,
other than accountable Acquisition Expenses payable to third parties with
respect to such Equipment, for all periods prior to the acquisition of the
Equipment by the Partnership. Except as described above, there will be no sales
of Equipment to or from any Affiliate of Com Cap Corp.
In certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of Equipment, to make advances to
manufacturers or vendors with funds borrowed from the General Partner for such
purpose. The Partnership does not borrow money from the General Partner or any
of its Affiliates with a term in excess of twelve months. Interest is paid on
loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the General Partner of its Affiliates from their
own funds at a rate equal to that which would be charged by third party
financing institutions on comparable loans from the same purpose in the same
geographic area, but in no event in excess of the General Partner's or
Affiliate's own cost of funds. In addition, if the General Partner or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of the Partnership, the General Partnership than that which the General
Partner or such Affiliates are paying. The Partnership does not loan money to
any Person including the General Partner or its Affiliates except to the extent
that a Conditional Sales Contract constitutes a loan.
If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase by
the Partnership, the purchaser is entitled to receive interest on the funds
expended for such purchase on behalf of the Partnership. Simple interest on any
such temporary purchases is charged on a floating rate basis not in excess of
three percent over the "prime rate" from time to time announced by PNC Bank,
from the date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.
The Partnership does not invest in equipment Limited Partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other that
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliated,
and (iii) the are no duplicate fees; and (b) the Partnership may invest in joint
venture arrangements with other equipment Programs formed by the General Partner
or its Affiliates if such action is in the best interest of all Programs and if
all the following conditions are met: (i) all the Programs have substantially
identical investment objectives; (ii) there are no duplicate fees; (iii) the
sponsor compensation is substantially identical in each Program; (iv) the
Partnership has a right of first refusal to buy another Program's interest in a
joint venture if the other Program wishes to sell equipment held in the joint
venture; (v) the investment of each Program is on substantially the same terms
and conditions; and (vi) the joint venture is formed either for the purpose of
effecting appropriated diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to certain provisions of the Partnership Agreement.
GLOSSARY
The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.
"Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment, whether or not actually acquired,
including, but not limited to, legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses and miscellaneous
expenses.
"Acquisition Fee" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or
18
<PAGE>
commissions shall be the Equipment Acquisition Fee, any commission, selection
fee, construction supervision fee, finance fee, non-recurring management fee
of a similar nature, however designated.
"Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced to not less than zero by any cash distribution received by the
Limited Partners pursuant to Sections 4/2 or 8/1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.
"Affiliate" means, when used with reference to a specified Person, (I) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person which the
specified Person is an executive officer of partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.
"Capital Account" means the separate account established for each Partner
pursuant to Section 4/.1.
"Capital Contributions" means, in the case of the General partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.
"Cash Available for Distribution" means Cash Flow plus net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.
"Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.
"Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.
"Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statues. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.
"Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.
19
<PAGE>
"Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.
"Cumulative Return" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.
"Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933, as
amended.
"Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.
"Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.
"General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.
"Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.
"Initial Closing " means January 27, 1998.
"IRA" means an Individual Retirement Account as described in Section 408 of
the Code.
"Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.
"Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 40% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.
"Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.
"Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.
"Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the Equipment, so that the non-cancelable rental payments under
the lease are absolutely net to the lessor.
20
<PAGE>
"Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a) (1) of the Code) for
each taxable year of the Partnership or shorter period or subsequent to an
interim closing of the Partnership's books with the following adjustments: (I)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income of shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant
to Treasury Regulations Section 1.704-1(b) (2) (iv) (I) and not otherwise taken
into account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1 (b) (2) (iv) (d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1 (b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.
"Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.
"Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.
"Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.
"Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
Equipment.
"Partners" means any one or more of the General Partner and the Limited
Partners.
"Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.
"Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.
"Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.
"Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (I) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.
"Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.
21
<PAGE>
"Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.
"Unit" means a limited partnership interest in the Partnership.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) Financial Statements January 27, 1998 (commencement of operations) to
December 31, 1999
Commonwealth Income & Growth Fund III
Report of Independent Auditors
Balance Sheets as of December 31, 1999 and 1998
Statement of Operations for the year ended December 31, 1999 and for
the period January 27, 1998 (commencement of operations) to December 31, 1999
Statement of Partners' Capital for the year ended December 31, 1999
and for the period January 27, 1998 (commencement of operations) to
December 31, 1999
Statement of Cash Flows for the year ended December 31, 1999 and for
the period January 27, 1998 (commencement of operations) to December 31, 1999
Notes to Financial Statements
Commonwealth Income & Growth Fund, Inc.
Report of Independent Auditors
Balance sheet as of February 28, 1999
Notes to Balance Sheet
Commonwealth Capital Corp.
Report of Independent Auditors
Consolidated Balance Sheet as of February 28, 1999
Notes to Consolidated Balance Sheet
(a) (2) Schedules.
Schedules are omitted because they are not applicable, not required, or
because the required information is included in the financial statements and
notes thereto.
(a) (3) Exhibits.
22
<PAGE>
* 3.1 Certificate of Limited Partnership
* 3.2 Agreement of Limited Partnership
27 Financial Data Schedule
* Incorporated by reference from the Partnership's Registration
Statement on Form S-1 (Registration No. 333-26933)
(b) Reports on Form 8-K.
NOT APPLICABLE
(c) Exhibits.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf on April 14, 1999 by the undersigned thereunto duly authorized.
COMMONWEALTH INCOME & GROWTH FUND III
By: COMMONWEALTH INCOME & GROWTH FUND,
INC., General Partner
By: /s/ George S. Springsteen
George S. Springsteen, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April14, 1999.
SIGNATURE CAPACITY
/s/ George S. Springsteen Chairman,President and Director of Commonwealth
- --------------------------- Income & Growth Fund, Inc.
George S. Springsteen
/s/ Kimberly A. MacDougall Executive Vice President, Chief Operating
- -------------------------- Officer and Director of Commonwealth Income &
Kimberly A. MacDougall Growth Fund, Inc.
/s/ John A. Conboy II Accounting Manager of Commonwealth Income &
- -------------------------- Growth Fund, Inc.
John A. Conboy III
23
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
February 28, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors..............................................1
Balance Sheet...............................................................2
Notes to Balance Sheet......................................................3
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholder
Commonwealth Income & Growth Fund, Inc.
We have audited the accompanying balance sheet of COMMONWEALTH INCOME & GROWTH
FUND, INC. (An indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1999. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. as of February 28, 1999, in conformity with generally accepted accounting
principles.
/s/ Fishbein & Company, P.C.
June 16, 1999
2
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
Balance Sheet
February 28, 1999
ASSETS
<TABLE>
<S> <C>
Cash $ 500
Receivable from Income Funds 128,803
Investment in Partnerships 3,000
-----------
$ 132,303
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 3,422
Due to parent 127,781
-----------
131,203
-----------
STOCKHOLDERS EQUITY
Common stock - No par value
Authorized 1,000 shares
Issued and outstanding 100 shares 1,000
Additional paid-in capital 1,000,100
-----------
1,001,100
Less note receivable (1,000,000)
1,100
-----------
132,303
-----------
</TABLE>
3
<PAGE>
Commonwealth Income & Growth Fund, Inc.
(an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
NOTE TO BALANCE SHEET
February 28, 1999
1. NATURE OF BUSINESS
Commonwealth Income & Growth Fund, Inc. (the Company) is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which is a wholly- owned subsidiary
of Commonwealth Capital Corp. (CCC). The Company is the sole General Partner of
Commonwealth Income & Growth Fund I, Commonwealth Income & Growth Fund II, and
Commonwealth Income & Growth Fund III, all Pennsylvania limited partnerships
(the "Partnerships).
CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,00. The note receivable is reflected on
the accompanying balance sheet as a reduction of the Company's equity.
The Company's operations are included in the consolidated federal income tax
return of CCC.
2. INVESTMENT IN PARTNERSHIPS
The Company contributed $3,000 in cash to the Partnerships for its general
partner interests. The Company may, at its sole discretion, purchase a limited
partnership interest in the Partnerships ("Units") for an additional capital
contribution of $20 per Unit with a minimum investment of 125 units.
3. RELATED PARTY TRANSACTIONS
The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. See "Compensation of General Partner and Affiliates, " and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund III for information with respect to the compensation to be paid to the
Company and its affiliates and the allocations of income, losses, and cash
distributions.
4
<PAGE>
COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED BALANCE SHEET 2
NOTES TO CONSOLIDATED BALANCE SHEET 3
</TABLE>
5
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholder
Commonwealth Capital Corp.
We have audited the accompanying consolidated balance sheet of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 1999, and the
related consolidated statements of operations and retained earnings and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the year ended in conformity with generally accepted accounting principles.
/s/ Fishbein & Company, P.C.
June 16, 1999
6
<PAGE>
COMMONWEALTH CAPITAL CORP.
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents $ 28,544
Receivables from Income Funds 346,272
Other receivables 64,754
Minimum lease payments receivable - Net of
unearned interest income of $2,084,813 5,260,000
Investment in income funds 16,200
Office furniture and equipment - Net of
accumulated depreciation of $108,789 10,649
Deferred offering costs 257,673
Other assets 9,042
----------
$5,993,134
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 141,265
Due to Income Funds 63,382
Nonrecourse obligations 5,260,000
----------
5,464,647
----------
STOCKHOLDER'S EQUITY
Common stock -Par value $1
Authorized 1,000 shares
Issued and outstanding 10 shares 10
Retained Earnings 528,477
----------
528,487
----------
$5,993,134
==========
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
1. BUSINESS
Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
computer peripheral equipment and other similar equipment, which are leased
primarily to U.S. corporations and institutions. Certain subsidiaries of CDI
were formed for the purpose of functioning as general partners/managing trustees
which own a 1% interest in limited partnerships/trusts (the "Income Funds"),
which were organized to acquire, own, and act as lessor with respect to certain
computer equipment. As of February 28, 1998, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF), and Commonwealth
Capital Delaware Trustee, Inc.
The Company is dependent on the compensation it receives from the Income Funds.
This compensation may be reduced due to the financial performance of each Income
Fund. There are certain Income Funds that have deferred fees subsequent to
February 28, 1998 because distributions to the limited partners were reduced
because of their financial performance. If the financial performance of
additional Income Funds deteriorates and the distributions to the limited
partners are reduced, there is no assurance that the Company would be able to
continue to collect fees for services provided. Management believes that fees
currently being collected will be sufficient to enable it to support its
operations during the next year. Commission income is derived from Commonwealth
Capital Securities Corp. which sells units of its affiliated partnerships
through broker dealer firms to their respective customers throughout the United
States.
2. ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, CDI, and CDI's subsidiaries (the Company) (See Note 1). All significant
interCompany transactions and balances have been eliminated.
8
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1999 cash
equivalents were invested in a money market fund investing directly in treasury
obligations.
REVENUE RECOGNITION
The Company recognizes fees as earned in accordance with the various General
Partnership and Trust Agreements. The Company recognizes commission income and
brokerage fee expense on an accrual basis based on the trade date of the
underlying customer transactions. Interest income on minimum lease payments
receivable is recognized as earned.
INVESTMENT IN INCOME FUNDS
The Company accounts for its 1% interests in the Income Funds by the equity
method. In 1998, certain Income Funds had liabilities in excess of their assets.
As the Company, which serves the General Partner, is obligated to fund any
liabilities in excess of assets, the Company reduced its investment in Income
Funds and recorded a Due to Income
INVESTMENT IN INCOME FUNDS (CONTINUED)
Funds of $63,382 at February 28, 1999 of which $17,269 was incurred during the
year ended February 28, 1999. Financial information of the Income Funds as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998
--------------
<S> <C>
Total assets $ 24,883,000
Nonrecourse debt 9,234,000
Other liabilities 1,068,000
Partners' capital 14,581,000
Net income (loss) (721,000)
</TABLE>
The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility
9
<PAGE>
for management of the Income Funds. In addition, the Company is responsible for
certain capital funding requirements of the General Partner Subsidiaries which
it satisfies through noninterest-bearing demand notes. Such notes total
approximately $4,166,000 at February 28, 1999 and have been eliminated in the
consolidation of the accompanying financial statements.
Fee income earned by the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds).
Approximately 64% of fee income for the year ended February 28, 1999, was from
two Income Funds.
OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment are stated at cost. Depreciation is provided
using the declining balance method over the estimated useful lives of the assets
(ranging from 5 to 7 years
DEFERRED OFFERING COSTS
Deferred offering costs represent amounts incurred by the Company for the
organization of an Income Fund. These costs are recovered from the Income Fund
through fees as cash proceeds are raised through the sale of Limited Partnership
Units during the offering period or if necessary the future operations of the
Income Fund. Deferred offering costs at February 28, 1999, relate to an Income
Fund whose offering period expires in July 2000.
3. LEASE COMMITMENTS
GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1999 under these leases and
certificates of participation are approximately $5,260,000 and are reflected as
minimum lease payments receivable and nonrecourse obligations in the
accompanying balance sheet. Of these amounts, $4,110,000 are secured by mortgage
insurance policies maintained by the lessee. The certificates mature at various
dates through 2011. The Company recognized interest income and interest expense
in connection with the lease purchase transactions of $395,375 for the year
ended February 28, 1999.
10
<PAGE>
Future minimum lease payments to be received as of February 28, 1998 are as
follows:
<TABLE>
<S> <C>
2000 903,828
2001 906,935
2002 683,324
2003 684,490
Thereafter 4,166,236
---------------
7,344,913
Less amount representing interest 2,084,813
===============
Total $ 5,260,000
===============
</TABLE>
The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in various dates through 2004.
Rent expense under all operating leases was approximately $174,000 for the year
ended February 28, 1999. Future minimum lease payments under noncancelable
operating leases at February 28, 1999 are as follows: $150,000 in 1999; $11,000
in 2000; and $4,000 in 2001.
<TABLE>
<CAPTION>
Year Ending February 28,
------------------------
<S> <C>
2000 $ 154,000
2001 146,000
2002 141,000
2003 143,000
2004 146,000
---------
$ 730,000
</TABLE>
PROFIT-SHARING PLAN
The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. There was no profit-sharing contribution for the years
ended February 28, 1999.
RELATED PARTY TRANSACTIONS
For the years ended February 28, 1999, certain of the General Partner
Subsidiaries agreed to waive or forgive the related Income Funds' obligations to
pay certain equipment management, acquisition, and financing fees in the amount
of $28,907. Accordingly, fee income from Income Funds is reflected net of these
amounts.
11
<PAGE>
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
The Company has net operating loss carryforwards of approximately $235,000 and
investment tax credit carryforwards of approximately $129,000 available to
reduce future federal income taxes. If not used, the carryforwards will expire
as follows
<TABLE>
<CAPTION>
NET OPERATING INVESTMENT
YEAR ENDING FEBRUARY 28, LOSSES TAX CREDITS
<S> <C> <C>
2000 $ $ 20,000
2001 57,000
2002 52,000
2013 38,000
2019 197,000
-------
235,000 $129,000
</TABLE>
The Company also has net operating loss carryforwards of approximately
$1,983,000 available to reduce future Pennsylvania state income taxes. If not
used, the carryforwards will expire as follows:
<TABLE>
<CAPTION>
Year Ending February 28,
<S> <C>
2006 $ 158,000
2007 651,000
2008 977,000
2009 197,000
----------
$1,983,000
</TABLE>
At February 28, 1999, the Company has deferred income tax assets of $370,000
arising primarily from net operating loss and investment tax credit
carryforwards, and deferred income tax liabilities of approximately $104,000
associated with ownership of general partnership interests in the various
operating Income Funds. The Company has recorded a valuation allowance for the
net deferred income tax assets of approximately $266,000 at February 28, 1999,
because the Company concluded the future realization of the assets could not be
reasonably assured based on current and expected operating results.
12
<PAGE>
Financial Statements
Commonwealth Income &
Growth Fund III
YEAR ENDED DECEMBER 31, 1999 AND THE PERIOD
JANUARY 27, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Commonwealth Income &
Growth Fund III
Financial Statements
Year ended December 31, 1999 and the Period January 27, 1998
(Commencement Operations) to December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors..................................1
Audited Financial Statements
Balance Sheets..................................................2
Statements of Operations........................................3
Statements of Partners' Capital.................................4
Statements of Cash Flows........................................5
Notes to Financial Statements...................................6
</TABLE>
<PAGE>
Report of Independent Auditors
The Partners
Commonwealth Income & Growth Fund III
We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund III as of December 31, 1999 and 1998, and the related statements of
operations, partners' capital, and cash flows for the year ended December 31,
1999 and for the period January 27, 1998 (commencement of operations) to
December 31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund III at December 31, 1999 and 1998, and the results of its operations and
its cash flows for the year ended December 31, 1999 and for the period January
27, 1998 (commencement of operations) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/Ernst & Young LLP
Philadelphia, Pennsylvania
March 24, 2000
1
<PAGE>
Commonwealth Income &
Growth Fund III
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 138,826 $ 507,193
Lease income receivable 108,281 65,729
Accounts receivable - General Partner 3,567 --
Other receivables 37 1,912
Computer equipment, at cost 3,355,144 1,453,742
Accumulated depreciation (949,291) (238,240)
-------------------------
2,405,853 1,215,502
Equipment acquisition costs and deferred expenses, net
of accumulated amortization of $61,939 for 1999 and
$20,779 for 1998 89,253 51,748
Organization costs, net of accumulated amortization
of $4,248 for 1998 -- 18,252
-------------------------
Total assets $2,745,817 $1,860,336
-------------------------
-------------------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 26,785 $ 38,355
Accounts payable - General Partner -- 349
Unearned lease income 59,258 52,192
Note payable 976,142 8,442
-------------------------
Total liabilities 1,062,185 99,338
Partners' capital:
General Partner 1,000 1,000
Limited partners 1,682,632 1,759,998
-------------------------
Total partners' capital 1,683,632 1,760,998
-------------------------
Total liabilities and partners' capital $2,745,817 $ 1,860,336
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Commonwealth Income &
Growth Fund III
Statements of Operations
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 27, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
1999 1998
-----------------------------
<S> <C> <C>
Income:
Lease $ 937,851 $306,249
Interest and other 16,107 37,797
-----------------------------
953,958 344,046
Expenses:
Operating, excluding depreciation 275,066 46,632
Equipment management fee - General Partner 46,893 15,313
Depreciation 826,051 238,240
Amortization of organization and equipment acquisition costs
and deferred expenses 59,412 25,027
Interest 55,270 584
-----------------------------
1,262,692 325,796
-----------------------------
Net (loss) income $ (308,734) $ 18,250
-----------------------------
-----------------------------
Net (loss) income per equivalent limited partnership unit $ (2.62) $ .16
-----------------------------
-----------------------------
Weighted average number of equivalent limited partnership units
outstanding during the period 118,562 100,707
-----------------------------
-----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Commonwealth Income &
Growth Fund III
Statements of Partners' Capital
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER GENERAL LIMITED
UNITS UNITS PARTNER PARTNERS TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial contribution and balance at
commencement of operations 50 25 $ 1,000 $ 500 $ 1,500
Contributions January 27, 1998
through December 31, 1998 -- 107,117 -- 2,142,340 2,142,340
Offering costs -- -- -- (234,641) (234,641)
Net income -- -- 1,691 16,559 18,250
Distributions -- -- (1,691) (164,760) (166,451)
------------------------------------------------------------
Partners' capital, December 31, 1998 50 107,142 1,000 1,759,998 1,760,998
Contributions through December 31, 1999 -- 25,792 -- 515,849 515,849
Offering costs -- -- -- (56,486) (56,486)
Net income (loss) -- -- 2,191 (310,925) (308,734)
Distributions -- -- (2,191) (225,804) (227,995)
------------------------------------------------------------
Partners' capital, December 31, 1999 50 132,934 $ 1,000 $1,682,632 $1,683,632
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Commonwealth Income &
Growth Fund III
Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 27, 1998
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
DECEMBER 31, TO DECEMBER 31,
1999 1998
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $(308,734) $ 18,250
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization 885,463 263,267
Other noncash activities included in determination of net
(loss) income (318,386) (10,454)
Changes in operating assets and liabilities:
Lease income receivable (42,552) (65,729)
Other receivables 1,875 (1,912)
Accounts payable (11,570) 38,355
Accounts receivable/payable - General Partner (3,916) 349
Unearned lease income 7,066 52,192
Organization costs paid to the General Partner -- (22,500)
------------------------------
Net cash provided by operating activities 209,246 271,818
INVESTING ACTIVITIES
Capital expenditures (730,316) (1,448,552)
Equipment acquisition fees paid to the General Partner (66,279) (72,527)
------------------------------
Net cash used in investing activities (796,595) (1,521,079)
FINANCING ACTIVITIES
Partners contributions 515,849 2,142,340
Proceeds from note payable -- 13,706
Offering costs paid to affiliate (46,426) (192,856)
Offering costs paid to the General Partner (10,060) (41,785)
Distributions to partners (227,995) (166,451)
Debt placement fee paid to the General Partner (12,386) --
------------------------------
Net cash provided by financing activities 218,982 1,754,954
------------------------------
Net (decrease) increase in cash and cash equivalents (368,367) 505,693
Cash and cash equivalents at beginning of period 507,193 1,500
------------------------------
Cash and cash equivalents at end of period $ 138,826 $ 507,193
------------------------------
------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements
December 31, 1999
1. THE PARTNERSHIP
Commonwealth Income & Growth Fund III (the "Partnership") is a limited
partnership. The Partnership is currently offering for sale up to 750,000 Units
of the limited partnership at the purchase price of $20 per unit (the
"Offering") and expect to issue such units on a monthly basis. The Offering will
terminate at the close of business on July 31, 2000 unless sooner terminated by
the General Partner or extended. The Partnership will use proceeds of the
Offering to acquire, own, lease, and sell various types of computer peripheral
equipment and other similar capital equipment, which will be leased primarily to
U.S. corporations and institutions. The Partnership's general partner is
Commonwealth Income & Growth Fund, Inc. (the "General Partner"), a Pennsylvania
corporation which is an indirect wholly-owned subsidiary of Commonwealth Capital
Corp. Approximately ten years after the commencement of operations, the
Partnership intends to have sold or otherwise disposed of all of its computer
equipment, make final distributions to partners, and to dissolve. Unless sooner
terminated, the Partnership will continue until December 31, 2009.
Allocations of income and distributions of cash are based on Commonwealth Income
& Growth Fund III, Limited Partnership Agreement (the "Agreement"). The various
allocations prevent any limited partner's capital account from being reduced
below zero and ensure the capital accounts reflect the anticipated sharing
ratios of cash distributions, as defined in the Agreement. For a limited
partner's unit outstanding for all of 1999, distributions during 1999 reflect a
return of capital in the amount of approximately $1.90 per limited partnership
unit. For a limited partner's unit outstanding from the Offering's first close
on January 27, 1998, distributions during 1998 reflected a return of capital in
the amount of approximately $1.63 per limited partnership unit. (For a limited
partner's unit acquired during either 1998 or 1999, the return of capital would
be less than these amounts.) Annual cash distributions to all partners in
subsequent years will be made at a rate of 10% of original contributed capital.
In the event the Partnership is unable to distribute sufficient cash to meet the
intended preferred distribution, such amounts will be deferred with no interest
until sufficient cash flow is available, as determined by the General Partner or
until the liquidation of the Partnership. The Partnership may also reduce
distributions to its partners if it deems necessary.
6
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES
REVENUE RECOGNITION
Through December 31, 1999, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
LONG-LIVED ASSETS
The Partnership evaluates its long-lived assets, when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether an impairment exists by estimating the undiscounted cash
flows to be generated by each asset. If the estimated undiscounted cash flows
are less than the carrying value of the asset, then an impairment exists. The
amount of the impairment is determined based on the difference between the
carrying value and the fair value. Fair value is determined based on estimated
discounted cash flows to be generated by the asset.
During 1999, the Partnership identified specific computer equipment and
associated equipment acquisition costs which were evaluated due to technological
changes. The Partnership determined that the carrying amount of certain assets
was greater than the undiscounted cash flows to be generated by these assets.
The Partnership recorded charges of $115,000 in the fourth quarter of 1999 to
record the assets at their estimated fair value. Such amounts have been included
in depreciation expense in the accompanying financial statements. There were no
adjustments during 1998.
Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of 4 years. Other deferred
expenses are amortized on a straight-line basis over 2 to 5 year lives.
Unamortized acquisition fees are charged to amortization expense when the
associated leased equipment is sold.
7
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At December 31, 1999 and 1998, cash
equivalents were invested in a money market fund investing directly in Treasury
obligations.
INCOME TAXES
The Partnership is not subject to federal income taxes; instead, any taxable
income (loss) is passed through to the partners and included on their respective
income tax returns.
Taxable income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in periods other
than those used for financial statement purposes, principally relating to
depreciation, amortization, and lease income.
OFFERING COSTS
Offering costs are payment for selling commissions of 7% and dealer manager fees
of 2% of the partners' contributed capital, professional fees and other offering
expenses relating to the syndication. These costs are deducted from partnership
capital in the accompanying financial statements.
NET (LOSS) INCOME PER EQUIVALENT LIMITED PARTNERSHIP UNIT
The net (loss) income per equivalent limited partnership unit is computed based
upon net (loss) income allocated to the limited partners and the weighted
average number of equivalent limited partnership units outstanding during the
period.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," was issued which requires that the costs associated with such
activities be expensed as incurred. SOP 98-5 was required to be adopted in the
first quarter of 1999 and resulted in the write-off of $18,000 of unamortized
organization costs.
8
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
3. COMPUTER EQUIPMENT
The Partnership is the lessor of equipment under operating leases with periods
ranging from 24 to 36 months. In general, associated costs such as repairs and
maintenance, insurance, and property taxes are paid by the lessee.
The following is a schedule of future minimum rentals on noncancelable operating
leases at December 31, 1999:
<TABLE>
<S> <C>
2000 $1,031,136
2001 687,902
2002 162,061
----------
$1,881,099
----------
----------
</TABLE>
Lease income from four lessees, each exceeding 10% of total lease income,
aggregated 80% of lease income for the year ended December 31, 1999.
Lease income from two lessees, each exceeding 10% of total lease income,
aggregated 88% of lease income for the year ended December 31, 1998.
4. RELATED PARTY TRANSACTIONS
ORGANIZATIONAL FEE
The General Partner is entitled to be paid an Organizational Fee equal to three
percent of the first $10,000,000 of Limited Partners' Capital Contributions and
two percent of the Limited Partners' Capital Contributions in excess of
$10,000,000, as compensation for the organization of the Partnership. During
1999 and 1998, such organizational fees of approximately $5,000 and $64,000,
respectively, were paid to the General Partner.
SELLING COMMISSION AND DEALER MANAGER FEES
The Partnership will pay to Commonwealth Capital Securities Corp. (CCSC), an
affiliate of Commonwealth Capital Corp., an aggregate of up to 9% of the
partners' contributed capital as selling commissions and dealer manager fees,
after the required $1,500,000 minimum subscription amount has been sold. During
1999 and 1998, selling commissions and dealer manager fees of approximately
$46,000 and $193,000, respectively, were paid to CCSC.
9
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
REIMBURSEMENT OF EXPENSES
The General Partner and its Affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies, or services obtained and used by
the General Partner in connection with the administration and operation of the
Partnership from third parties unaffiliated with the General Partner. In
addition, the General Partner and its affiliates are entitled to reimbursement
for certain expenses incurred by the General Partner and its affiliates in
connection with the administration and operation of the Partnership. During 1999
and 1998, $26,000 and $7,500, respectively, of expenses were reimbursed to the
General Partner. During 1999, the General Partner also received reimbursement of
$21,000 of expenses relating to 1998.
EQUIPMENT ACQUISITION FEE
The General Partner is entitled to be paid an equipment Acquisition Fee of 4% of
the Purchase Price of each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and the lease thereof or sale
under a conditional sales contract. The fee is paid upon each closing of the
Offering with respect to the equipment to be purchased by the Partnership with
the net proceeds of the Offering available for investment in equipment. If the
Partnership acquires equipment in an amount exceeding the net proceeds of the
Offering available for investment in equipment, the fee will be paid when such
equipment is acquired. During 1999 and 1998, equipment acquisition fees of
approximately $66,000 and $73,000, respectively, were paid to the General
Partner.
DEBT PLACEMENT FEE
As compensation for arranging term debt to finance the acquisition of equipment
by the Partnership, the General Partner is paid a fee equal to 1% of such
indebtedness; provided, however, that such fee shall be reduced to the extent
the Partnership incurs such fees to third parties, unaffiliated with the General
Partner or the lender, with respect to such indebtedness and no such fee will be
paid with respect to borrowings from the General Partner or its Affiliates.
During 1999, debt placement fees of approximately $12,000 were paid to the
General Partner. No debt placement fees were paid during 1998.
10
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
EQUIPMENT MANAGEMENT FEE
The General Partner is entitled to be paid a monthly fee equal to the lesser of
(i) the fees which would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (a) two percent of (1) the
Gross Lease Revenues attributable to equipment which is subject to full payout
net leases which contain net lease provisions plus (2) the purchase price paid
on conditional sales contracts as received by the Partnership and (b) 5% of the
gross lease revenues attributable to equipment which is subject to operating
leases. During 1999 and 1998, equipment management fees of approximately $47,000
and $15,000, respectively, were paid to the General Partner, as determined
pursuant to section (ii) above.
EQUIPMENT LIQUIDATION FEE
With respect to each item of equipment sold by the General Partner (other than
in connection with a Conditional Sales Contract), a fee equal to the lesser of
(i) 50% of the competitive equipment sale commission or (ii) three percent of
the sales price for such equipment is payable to the General Partner. The
payment of such fee is subordinated to the receipt by the Limited Partners of
the net disposition proceeds from such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the extent any liquidation or resale fees
are paid to unaffiliated parties. There were no such fees paid to the General
Partner in 1999 and l998.
11
<PAGE>
Commonwealth Income &
Growth Fund III
Notes to Financial Statements (continued)
5. NOTE PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------
<S> <C> <C>
Installment note payable to a bank; interest at 6.60%; due in monthly
installments of $4,983 including interest through January 2002 $116,093 $ --
Installment note payable to a bank; interest at 6.60%; due in
monthly installments of $9,951 including interest through January 2002 231,851 --
Installment note payable to a bank; interest at 7.12%; due in
monthly installments of $4,685 including interest through March 2002 116,850 --
Installment note payable to a bank; interest at 6.75%; due in
monthly installments of $19,800 including interest through April 2002 511,618 --
Installment note payable to a bank; interest at 7.15%; due in
monthly installments of $685 including interest through December 1999 -- 8,442
-------------------
$976,142 $ 8,442
-------------------
-------------------
</TABLE>
These notes are secured by specific computer equipment and are nonrecourse
liabilities of the Partnership. Aggregate maturities of notes payable for each
of the three years subsequent to December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $420,057
2001 449,242
2002 106,843
--------
$976,142
--------
--------
</TABLE>
The fair market value of debt approximates its carrying value at December 31,
1999 and 1998.
12
<PAGE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
Other noncash activities included in determination of net income are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------
<S> <C> <C>
Lease income, net of interest expense on
notes payable realized as a result of direct
payment of principal by lessee to bank $270,908 $ 5,264
Lease income paid to original lessor in lieu
of cash payment for computer equipment
acquired 47,478 5,190
-------------------
Total adjustment to net income from other
noncash activities $318,386 $ 10,454
-------------------
-------------------
</TABLE>
No interest or principal on notes payable was paid by the Partnership because
direct payment was made by lessee to the bank in lieu of collection of lease
income and payment of interest and principal by the Partnership.
<TABLE>
<S> <C> <C>
Debt assumed in connection with the
purchase of computer equipment $1,238,608 $ --
</TABLE>
7. RECONCILIATION OF NET LOSS REPORTED FOR FINANCIAL REPORTING PURPOSES TO
TAXABLE INCOME ON THE FEDERAL PARTNERSHIP RETURN
<TABLE>
<CAPTION>
1999 1998
----------------------
<S> <C> <C>
Net loss for financial reporting purposes $(308,734) $ 18,250
Adjustments:
Depreciation 316,429 92,865
Amortization 37,766 14,709
Unearned lease income (14,316) 21,345
Other (10,838) 13,502
----------------------
Taxable income on the Federal Partnership Return $ 20,307 $ 160,671
----------------------
----------------------
</TABLE>
8. SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Partnership issued 4,591 limited
partnership units and raised approximately $90,763 of net proceeds.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Balance Sheets and Consolidated Statements of Operations found on pages 3 and 4
of the Company's Form 10K for the year to date and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 138,826
<SECURITIES> 0
<RECEIVABLES> 111,885
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 250,711
<PP&E> 3,355,144
<DEPRECIATION> (949,291)
<TOTAL-ASSETS> 2,745,817
<CURRENT-LIABILITIES> 1,062,185
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,683,632
<TOTAL-LIABILITY-AND-EQUITY> 2,745,817
<SALES> 0
<TOTAL-REVENUES> 937,851
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,207,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,270
<INCOME-PRETAX> (308,734)
<INCOME-TAX> 0
<INCOME-CONTINUING> (308,734)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (308,734)
<EPS-BASIC> (2.62)
<EPS-DILUTED> 0
</TABLE>
